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Look for distinguishing factors while investing in new schemes
Published On , 21 Sep 2017 By Times Of India
For a long time__thanks to those initial public offers (IPOs) which, over the years, gave huge returns__mutual fund investors too thought that investing in new fund offers could be highly rewarding. This idea got a further boost from investors’ reluctance to invest in mutual fund schemes with high net asset values (NAVs). However, the idea that investing in NFOs is always better than investing in existing MF schemes even if the NAV is high, is a myth. The absolute NAV of a MF scheme should not matter when it comes to whether it is a good fund or not. An NFO at Rs 10 per unit may not necessarily be cheap. The units are so priced because it is just starting out and has no investments to gain or lose from, financial planners say.
SO WHAT ARE THE CRITERIA FOR SELECTING TO INVEST IN AN NFO
The return potential from any given NFO should be the starting point for investing in an MF scheme. Although a fund’s track record of returns and also the quality of its portfolio matter while deciding to invest in a fund, these factors, however, do not hold good for NFOs. The next factor to look at is the fund manager’s track record and his/her ability in recent years to generate consistent returns, financial planners said.
Another factor to look at is if the NFO is offering any new idea to invest in. Check with other existing funds in the market to distinguish the fund open for an NFO for that new idea that no other fund offers. Seen another way, an NFO could offer a unique edge to your overall portfolio that no other fund could possibly offer.
Usually mutual funds, especially which invest in stocks, are financial products for long term investing. So in an Equity NFO, look for the long term propositions that the scheme has to offer. Also for investing in NFOs look at the track record of the fund house that is launching the NFO, in facilitating long term investing, financial planners said.
Another distinguishing factor to invest in an NFO could be lower cost to the investor. To compete with existing MF schemes with similar ideas or themes, an NFO from a fund house may decide to charge a lower fee to its incoming investors. And since a lower cost adds up to the eventual returns to investors, the returns could be higher, which could be a compelling reason to invest in the new fund.
A CASE FOR INVESTING IN CLOSED-ENDED FUNDS
In India, when we talk about mutual funds, usually we think about those schemes units of which could be bought and sold easily, and at a price which is almost equal to the NAV. These are called open-ended funds.
However, there is also a cousin of open-ended funds, called closed-ended funds which are traded on the exchanges. A closed-ended scheme is one in which entry and exits of investors by selling directly to the fund house, like in open-ended funds, is not allowed. Here investors invest in the fund when it’s open for subscription (usually for a few days) and then no new investors are allowed for the duration of the fund (which is usually a few years). The units are, however, listed and traded on the exchange. So investors looking for liquidity, that is looking to sell and get some cash out for whatever reason, could sell on the exchange to redeem their units. However, at times closed-ended funds trade at a discount to the NAV.
Financial planners and advisors says that an investor could look at investing in closed-ended funds only when they have some extra funds that they would not need at least for the duration of the fund. If they need money in the interim and intends to sell his/her units, they may get a price that is at a discount to the NAV.
Another reason for investing in closed-ended funds could be if the fund offers some new idea for investing that may not be available in the existing bouquet of funds.
Since closed-ended funds do not allow new investors after the initial phase, the fund manager has more independence to invest and hold his/her portfolio even if the markets witness volatility. These funds also do not witness any volatility due to any large redemption, something that open ended funds may witness.
Some advisors also say that if one is willing to buy units of closed ended funds from the market, which is trading at a discount, and then holds it till its maturity, there is a high chance of realising profits higher than what the market would have offered.
THINGS TO REMEMBER WHILE INVESTING IN A NEW MUTUAL FUND SCHEME
What is the return potential of the fund
Fund manager’s track record
Fund house’s track record
What is the long term proposition (in Equity and balanced funds)
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